The Takeovers Panel (Panel) has recently commenced the consultation process on three guidance notes. These include the Guidance Notes on frustrating action, takeovers documents and a proposed new Guidance Note on dividends. Below we discuss some of the key proposed changes.
Guidance Note 12: Frustrating Action details the Panel’s approach to actions from target directors that could frustrate a bid (for example, by triggering the defeating conditions to the bid) and whether those actions could give rise to a declaration of “unacceptable circumstances” by the Panel and consequential issue of remedial orders.
In considering whether actions by target directors are impermissible frustrating action, the Panel has said that it will now consider the following additional matters in determining whether unacceptable circumstances exist:
- whether a bid condition has been triggered and the bidder has not disclosed whether it will rely on the condition or waive it within a reasonable period of time; and
- whether a condition has been triggered and the bidder has varied the offer (for example by increasing the offer price) but has not waived a breach of the condition.
These proposed amendments have arisen from market participants’ concerns that the current frustrating action policy could unduly restrict target activities (in particular in circumstances where a bid condition has been triggered, and it is unclear whether a bidder will rely on it, the policy could be used to coerce a target into negotiations with a hostile bidder). These proposed amendments are to be welcomed, although it must be noted that the determination of whether unacceptable frustrating action has occurred will always be determined on a case-by-case basis (as it is very much dependent on the facts of each case). The proposed amendments may also increase the pressure on bidders to quickly make public announcements following a defeating condition being triggered otherwise a delay may be a relevant factor in determining whether the target’s actions give rise to unacceptable circumstances.
It is common practice for bidder’s statements to include a summary of the offer and key information at the front of the bidder’s statement. The Panel now proposes to include in Guidance Note 18: Takeover Documents ‘best practice guidance’ on the contents of a summary section for bidder’s statements. The purpose is to, in particular, encourage the use of summaries that are accessible to retail shareholders.
The key features of the best practice guidance are:
- the Panel considers that the summary section should consist of key headings. These will include details of the offer consideration, reasons to accept the offer (or, in the case of a target statement, accept or reject the offer), key dates, conditions of the offer, information on the bidder, a summary of any expert reports that were commissioned and risks; and
- the length of the summary should be short enough to comprehend quickly.
While the above guidance from the Panel is of course welcome, we consider that it is standard market practice for the above salient information to already be detailed in summary form in a bidder’s statement, although it is often included in Q&A format. The adoption of the summary section is likely to remove, or reduce, the need for a Q&A.
The Panel also proposes to introduce a new Guidance Note on the treatment of franking credits on the consideration offered under a bid. The treatment of franking credits has arisen twice before the Panel in recent times, including in respect of the hotly contested battle for control of Warrnambool Cheese and Butter.
Bidder’s statements often reserve a right for the bidder to reduce the value of the offer consideration by the value of any dividends (and associated franking credits) paid during a bid. The purpose of doing this is to prevent value leakage due to distributions by the target during the offer period. The proposed Guidance Note will now require that bidder’s statements clearly detail how the deduction will be calculated (either by a formula or as a fixed amount). This will be an extension for many existing bidder’s statements which do not provide this level of detail. For example, if during the offer period a fully franked dividend is paid by the target, a bidder can deduct the amount of the dividend plus a stated percentage of the face value of the franking credits provided that it has clearly disclosed the amount of the deduction and established the basis for that figure.
Separately, the proposed Guidance Note indicates that including the value of franking credits in the headline offer price is likely to give rise to unacceptable circumstances. If a bidder permits shareholders to retain a dividend paid during an offer period, the bidder can refer to the dividend as part of its headline offer price, but it cannot include the value of franking credits in the headline offer price (rather, the reference to the franking credit should be made in a separate suitably qualified statement).
The consultation periods expire on 28 February 2014 (other than in respect of Guidance Note 12: Frustrating Action which expires on 14 February 2014). We will keep you updated of important developments.